I have recently been spending a lot of time on eBay (EBAY) and PayPal, both buying and selling $1000's worth of merchandise.
I have experienced the "negative" side of eBay, making me rethink my ties to the service. I believe that my experiences are one of the many reasons why 1000's of eBay sellers have left in the previous years, hence slowing eBay's potential market value.
Once more, many sellers are unhappy with the service and some if its ridiculous rules and actions, such as blocking 15,000 eBay sellers from selling on eBay, holding funds from sellers, and hiding listings.
I believe that eBay is catering to the buyers, believing that when the buyers are there the sellers will come soon after. While this might be true, ignoring a party in the transaction can turn the deal upside down, jeopardizing both parties' association with eBay.
While I believe that eBay has some negative aspects, there are also many positive factors. In this article I will compare eBay and PayPal to their competitors, and their potential value in the near future comparatively.
eBay's potential can be mainly tagged to its mobile aspect, allowing members to both buy and sell from a wide array of devices. Currently 21% of members use multiple devices, accounting for 44% of eBay's transactions in 2012 and the mobile app has been downloaded more than 200M times.
Nearly 6M listings are added a week through eBay mobile (there have been 405M listings posted in eBay mobile's history), leading eBay to believe that their mobile commerce volume (MCV) will increase over 50% from 2012 to 2013, amounting to $20B this year.
Mobile is useful for sellers in categories where items cannot be scanned and need specific photographs, like car parts, which sold 831,000 mobile items a week in Q3 2013.
Once more, eBay is expanding to even more devices, including the newly released Samsung smart watch, designing a special app for the device.
eBay is one of the largest online marketplaces, which reported 124M active users in Q3 2013. One of the major advantages eBay has is its international presence. In Q3 2013, $11B of merchandise was sold across borders, representing 22% of its Enabled Commerce Volume (ECV).
One problem I noticed while reading over the presentation, is that ECV increased 21% to $52B, while revenue increased only 12% to $2B. This leads to concern that while the marketplace may continue to grow, eBay's profit might not.
PayPal is perhaps the leader in online ecommerce transactions, representing 137.4M active users and $43.8B (up 25%) in payment volume in Q3 2013 (and 42% of eBay Inc's revenue). PayPal supports more than 25 currencies in more than 190 markets (International sales represent more than half of PayPal's revenue), but also has localized special websites to 80 different markets.
Paypal completed more than 700M transactions in Q3 2013, while losing only .3% of their members in the quarter (396,000) and adding nearly 5M new ones.
eBay Enterprise runs online shopping sites for brick and mortar stores, with more than $785M in merchandise sales in Q3 2013.
I believe that there are several ways to value eBay Inc: either based on users or segment.
eBay Inc. broken down by segment:
(Includes marketing services and other revenue)
|Service||Revenue (Change)||Net Income (Change)||Value (12x P/E)|
|Marketplace||$2027M (12.2%)||$789M (12%)||$9.5B|
|Payments||$1620M (18.5%)||$368M (19%)||$4.4B|
|Enterprise||$238M (5%)||$12M (-14%)||$144M|
Broken down by division, eBay has a Q3 2013 earnings of $1.1B. To annualize this number, we can multiply by 4.1 (as analysts believe Q3 represents 24% of yearly revenue). This gives us a 2013 earnings of $4.4B. While the growth and P/E change, I believe it is safe to assume that eBay will continue to trade above market averages.
If we say that eBay is a technology stock, we can assume a forward P/E of 12, valuing eBay at $52.8B. This is more than 20% less than eBay's current market value of $66.74B.
eBay Inc. broken down by users:
*Includes all users, including prime members
Taking into account that Alibaba (owned by Yahoo! (NASDAQ:YHOO)) is both a marketplace and an e-commerce processor, it could be considered closest to eBay inc. We don't have exact numbers yet, but it is safe to assume that they have 250M combined users. For eBay, the e-commerce and marketplace is mostly together, leaving me to wonder how dependent PayPal is on eBay's marketplace (i.e. If eBay members leave, they will no longer use PayPal either).
We can use BrainTree, which eBay recently bought out for $800M, as an example for PayPal's 137.4M active users. Valuing each customer at $23, PayPal could be valued at $3.16B. The true value of eBay Inc. would come from eBay's marketplace.
If we value each eBay user as compared to its American competitor, Amazon (NASDAQ:AMZN), we would be valuing each of eBay's 124M users at $284.50. This would give eBay Marketplace a value of $35.2B. When we include current assets, investments, and property & equipment, while subtracting liabilities we get an extra $13B in value (being generous as other ecommerce sites may not have the same assets).
Both of my methods of valuing eBay Inc. yielded similar results: I believe that eBay is over valued by more than 20%.
When you take into account that more and more competitors are arising, it will be hard for eBay to continue to hold onto a large marketshare of customers. Not only are they competing with Amazon and Wal-Mart (NYSE:WMT), but also with specialized online marketplaces.
While eBay still has some cool features and useful tools, it is hard to compete with companies such as Google Wallet (NASDAQ:GOOG) which does not even charge merchants.
All in all, I believe that while eBay can achieve its current evaluation if it continues to grow extensively, it is limited by several factors:
-If they raise fees, many sellers will leave which we have already seen happen.
-If they try and expand to different markets, they will be competing against already established marketplaces.
In my opinion, it is not worth overpaying for eBay's potential growth. Valuing each eBay member at $285, means that each member needs to sell roughly $2850 worth of merchandise (not including eBay's costs, or lower fees for eBay store owners [who sell most of the goods on eBay]). While this might seem like a realistic number, we have to remember that the average eBay member is a buyer, not a seller. I believe that while eBay can increase revenue and profit, it will not be enough to support the current evaluation. I recommend not to Buy-It-Now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an eBay and PayPal user, and am only expressing my opinions of the stock. I believe that eBay/PayPal are great services. While I have had some negative experiences, I plan to continue to use them (unless there is a price hike).